As the Chinese government pays more attention to environmental protection, law enforcement in this area has been strengthened. The above-mentioned practice of ignoring environmental policy is no longer the trend. For example, an oil-and-chemical company's multi-billion renminbi oil project that was constructed without an environmental impact assessment had to be suspended when the EIA result produced afterwards was rejected by the environmental administration. This forced the company to revise its application of planning and zoning for re-approval, and resulted in a great economic loss. Such system is called the “EIA one-vote veto”.

In addition, China has released a series of environmental policies, such as the pollution discharge fee collecting system, the administrative hazardous waste disposal system, the promotion of environmental-friendly construction materials, the environmental protection examination system for listed companies, the online-monitoring system for corporate polluters, and the energy-saving and discharge reduction policy. These policies reveal the increasing strictness of China's environmental policies.

It is foreseeable that future environmental law and policies will be further improved and the burden of corporate responsibility, with respect to environmental protection, will be further increased. The mandatory environmental insurance and environment tax being heatedly discussed within the environmental legal community may become a reality in the near future. Therefore, enterprises are strongly recommended to conduct thorough research on environmental regulations and policies before they start their operations in China. They should not only take into consideration these laws and policies, but also abide by them in order to avoid unnecessary costs and losses.

Jihong Wang
Partner
V&T Law Firm

The international perspective

Amidst its focus on maintaining strong economic growth, China is also focused on reducing the impact of continued industrialisation on the environment. As part of this plan, China has committed itself to increasing the amount and efficiency of energy conservation projects. In the 11th Five Year Economic Plan (2006-2010), China has set a target to reduce energy consumption per unit of GDP by 20%, following a strategy of “low input, low consumption, less emission and high efficiency”.

Businesses operating in China should expect to see governmental limits on energy consumption. The government will be focused on reducing energy consumption among the high-energy consuming industries (steel, nonferrous metals, coal, electricity, petroleum, petrochemicals and chemical engineering) and in particular among those businesses consuming in excess of 10,000 tons of standard coal each year. But this emphasis on stricter governmental limits will be balanced with the implementation of policies geared to reward energy conservation. On April 2 2010, the State Council approved the Opinion on Accelerating the Implementation of Contractual Energy Management to Promote the Development of Energy Saving Service Industry (关于加快推行合同能源管理促进节能服务产业发展的意见), which sheds light on the policy aspects of China's energy conservation, incorporating a mixture of tax-driven incentives with the utilisation of market mechanisms to encourage technological innovation. In this context, there are several cost-efficient strategies a business operating in China should consider.

First, explore the possibilities to engage a contractual energy management (CEM) company. In general, the CEM company will receive payments tied to the operating business' reduction in energy consumption and thus should not result in increased costs for the operating business. No increase in costs, less energy consumption and potential Chinese tax benefits in the future make this an attractive option.

Second, determine if alternative energy projects could be incorporated into existing operations. An added benefit is that the application of such technologies may potentially become a source of revenue if the projects qualify as registered Clean Development Mechanism projects (CDM projects). The Chinese government has set priority areas for CDM projects that result in an improvement in energy efficiency, in the development and utilisation of new and renewable energy, and in methane recovery and utilisation. China is now the world leader in both registered CDM projects and in issued certified emission reductions. There are still strict rules concerning foreign-invested CDM project approval in China, however, which include that the project owner must be a Chinese entity in which the Chinese partner holds the controlling shares. Thus, the implementation of CDM projects require careful planning and structuring, but offer the possibility of additional revenues derived from “going greener”.

Third, keep abreast of regulatory developments, especially the latest developments of the 12th Five Year Economic Plan (2011-2015). In its drive for sustainable energy development, China has already issued and will certainly be issuing more environmental policies to encourage compliance by appropriate economic incentives. Thus, it is important to be aware of these developments to capture the benefits—and avoid any costs from non-compliance.

Xiao Yong, Partner
Richard Berberian, Associate
Vinson & Elkins